IMF ACKNOWLEDGES ISLAMIC BANKING’S PROLIFIC GROWTH
It is now offered in more than 60 countries on all continents, and has become important in 14 jurisdictions
THE International Monetary Fund (IMF), especially under its current managing director, Christine Lagarde, has been a proactive supporter of Islamic banking, and, together with the World Bank, has declared it a priority for its operations in countries with Islamic banking.
In a recent report titled “Ensuring Financial Stability in Countries with Islamic Banking”, IMF economists have thrown down the gauntlet to its board with a plan of action that, if approved, would have game-changing implications for the regulation and development of the industry, thus further promoting its stability and soundness.
The report acknowledges the significant progress achieved in developing prudential standards for Islamic banking, but concludes that the current framework governing the global industry “contains many gaps that need to be closed through the development of a more comprehensive enabling environment that ensures the financial stability and sound development” of the industry.
Prudential standards for conventional banks generally apply to Islamic banks, but gaps exist, reflecting the specific features of Islamic banking and their associated risks. Prudential standards for Islamic banking have been developed to complement international standards, including, inter alia, on capital adequacy, “Core Principles of Islamic Finance Regulation for Banking (CPIFR)” and the supervisory process.
Particular attention needs to be paid to developing resolution, financial safety nets, such as deposit protection insurance and a lender of last resort, and (shortterm) liquidity management frameworks for Islamic banks. Similarly, the emergence of complex hybrid Islamic financial institutions and products, according to IMF, is a regulatory challenge, with potential implications for financial stability.
The industry has seen prolific growth over the last three decades in size, complexity of products and services, and in demographic reach. Innovation usually drives financial regulation. But, this sheer growth has posed a challenge to regulators, especially in emerging markets, given their limited resources, lack of technical expertise and knowledge of Islamic banking principles, qualified personnel, and for socio-political reasons where the phenomenon is not a financial policy priority, but was introduced for financial inclusion reasons.
The outstanding exception is Malaysia, which the IMF, World Bank and the Basel Committee for
TUESDAY, MARCH 21, 2017 Banking Supervision concur, has the most advanced and comprehensive legal, regulatory, supervisory and syariah governance frameworks in place in the world, supported by a proactive government public policy supporting the development of Islamic banking side-by-side a conventional one to give Malaysian consumers a choice not only on product preferences, but also on their faith traditions.
In the context of the global financial system, Islamic banking’s estimated size of US$2.6 trillion (RM11.5 trillion) of assets under management accounts for a mere 1.9 per cent of total market share of global banking assets, which is miniscule by international standards, but which points to a huge potential for expansion, especially as the world is in search of alternative financial intermediation solutions to the capitalist system in the aftermath of the pernicious global financial crisis of 2008, the effects of which are still impacting the global economy and financial system.
Islamic banking is now offered in more than 60 countries on all continents, and, according to IMF, has become systemically important in 14 jurisdictions. This means it accounts for 15 per cent or more of the market share of the total banking sector. In some countries, this figure is 40 per cent, while in others, such as Malaysia, it is about 26 per cent. Putrajaya has the ambition of reaching a market size target of 30 per cent by 2020. The number of jurisdictions in which Islamic banking is becoming systemically important is set to increase to 20 in the immediate future as Organisation of Islamic Cooperation (OIC) countries seek new ways to raise funds for development and infrastructure spending.
The regulatory, prudential and supervisory regimes for Islamic banking in most OIC countries are a “work in progress”. The specificities of Islamic banking, especially the nature of deposits and
The International Monetary Fund, under managing director Christine Lagarde, is a proactive supporter of Islamic banking. IMF economists have a plan of action that, if approved, would have game-changing implications for the regulation and development of the industry, thus further promoting its stability.